Fontana Company enters into a lease agreement on January 1, 2020, for nonspecialized equipment leased by Mindbender Insurance Company. The following data are relevant to the lease agreement:

• The term of the lease is 4 years with no renewal or purchase options. Annual lease payments of $148,000 are due on January 1 of each year and include all applicable taxes.

• The fair value of the equipment on January 1, 2020, and the cost to Mindbender is $450,000. The equipment has an economic life of 4 years with no salvage value.

• Fontana depreciates similar machinery that it owns using the straight-line method.

• The lessee payments to the lessor include a charge for maintenance. The lessor sells a similar maintenance agreement for $25,000 when purchased without a lease contract. The machinery is leased for $150,000 per year, including taxes, when lessees do not accept the maintenance contract.

• Fontana’s incremental borrowing rate is 10% per year. The lessee does not know the implicit rate used in the lease computations.

• Mindbender indicates that collection from Fontana is reasonably certain.

• Fontana does not make a policy election not to separate the lease and nonlease components.

Required »

a. Indicate the type of lease Fontana Company has entered into and what accounting treatment is applicable. Round percentages to the two decimal places.

b. Prepare an amortization schedule for the entire lease term.

c. Prepare the journal entries on Fontana’s books that relate to the lease agreement for the first year of the lease term.